It's been nearly three decades since I started seriously saving for retirement outside of a workplace retirement account, but I remember it like it was yesterday. I had saved up a couple of thousand bucks -- a fair amount of money for me at the time -- and opened an online brokerage account when the internet itself was still fairly new. Armed with a degree in finance and a book containing much of the Oracle of Omaha's collective investing wisdom (The Essays of Warren Buffett: Lessons for Corporate America, by Lawrence Cunningham), I was on my way to making a fortune in the stock market.
And I did ... all right. As I look back now, I know I could have done better. But I have no complaints.
What I do have is a much better developed appreciation for Warren Buffett's brilliance -- something that's been on my mind quite a bit now that he's only a few weeks away from stepping down as Berkshire Hathaway's (BRK.A 0.26%) (BRK.B 0.14%) CEO and resident stock-picking guru.
If I could do it all over again, here's how and why I'd be a better student of Buffett's ways.
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I'd worry less about a stock's P/E ratio
It's curious. A price-to-earnings (P/E) ratio may be the only meaningful fundamental-based way of comparing one stock to another. Yet of all the investing advice Buffett's doled out over the course of his life, I don't recall him ever explicitly saying anything about using a P/E multiple when evaluating particular tickers -- something I've at times been obsessed with doing.
That's not to say he'll pay any price for a compelling company. As he's famously said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," indirectly acknowledging that they're not all the same in terms of valuation. I'll simply say that my picky P/E standards have probably hurt my performance more than they've helped. Good stocks tend to consistently command strong valuations; cheap stocks are cheap for a reason.
I'd recognize that (almost) everybody is selling something
Here's another idea that Warren Buffett has never directly voiced, but certainly touched on: He said, "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients." The simpler version of this warning was worded as "Those who cannot fill your pocket will confidently fill your ear."
It's not just brokers and investment managers, though. Companies themselves are also increasingly aggressive when it comes to highlighting their potential upside, perhaps because so many insiders are being compensated with stock.
I'd trust my instincts more
To my knowledge, Buffett's never directly said any one thing about this. But a great deal of everything he's said (along with a cataloging of my own successes and failures) leads me to this conclusion: I should have listened to the little voice inside my head a little more, and listened to analysts a little less. Most of my hand-picked names were stocks that Wall Street wasn't interested in at the time, but they've done better than my holdings inspired by the financial media.
I'd fully embrace the Pareto principle
If you're not familiar with it, the Pareto principle is just the fancy name for the 80/20 rule. In the investing realm, it means that 80% of your total gains will come from 20% of your trades, no matter what your time frame is.
This can be tough for most people to digest. While reasonable investors understand that different holdings will yield different returns, the notion that most of your picks won't actually live up to expectations is difficult. It feels like you're doing something wrong.
You're not doing anything wrong, though. This is the way the market has always worked, even for Berkshire Hathaway's holdings. The key is just not to lose major money on any of your trades. Two out of 10 will perform well enough to more than make up for the mediocre performance of the other eight. Or as Buffett himself put it, "The weeds wither away in significance as the flowers bloom."
I'd be less active
It's human nature to connect activity with productivity -- more of the former should result in more of the latter. And in many aspects of life, this is the case.
Not in investing, though: When it comes to owning stocks, less is more. Too much trading often ends up undermining your bottom line by getting you out of a position too soon, or putting you into stock trades you probably don't actually want to be in. That was certainly the case for me, anyway. In Buffett's own words, "The difference between successful people and really successful people is that really successful people say no to almost everything."
I'd remain as patient as Buffett is -- even when it's not easy
Finally (and this will come as no surprise), if I could do it all over again, I'd be freakishly patient with all of my stock holdings.
As Buffett rightfully points out, "The stock market is designed to transfer money from the active to the patient." This is a shorter version of his famous observation, attributed to his stock-picking hero Benjamin Graham, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." We all make bad decisions when swayed by fear and greed. Yet both emotions prevent the kind of level-headed decision-making that we need in order to extract the most net value from the stock market.
And in my do-over, I could afford to exercise this patience because I'd have fewer but higher-quality companies in my portfolio.
